Naturally, all this spending has attracted jealous eyes from many quarters.
Fans of other League One clubs on social media have openly questioned how Blues can make such huge signings with some assuming that financial fair play issues will now be just around the corner.
It’s not hard to understand why so many people are so confused as to how Blues have been able to spend so much cash.
After all, people get into football to watch sport rather than to flex their business administration or accountancy knowledge.
The complexities of financial fair play regulations mean that it’s difficult for many people to understand exactly what is going on, leaving pundits and fans alike to resort to opinions based on guesswork and straw man hypotheses.
As Blues fans, we know all too well the trap that the club can fall into with overspending.
Back in 2017 Blues went on a trolley dash that left the club struggling to meet FFP regulations and ended up seeing the club being placed under transfer embargoes and being deducted points.
Worse than that, some of the mistakes made crippled the club for a longer period of time – and in my opinion at least, were a contributing factor to the club’s eventual relegation to League One.
I’m not an accountant by any means, but my time writing this website means I’ve gained something of an understanding as to what the rules are, and what Blues can and can’t do.
With this in mind, I’ve put together this article to try and help reassure Blues fans that we really can afford this kind of profligate spending; while also educating non-Blues fans as to how we’re not breaking the rules.
The “Net Spend” Fallacy
It’s been known for a while that Summer 2024 was going to be an interesting transfer window for Blues.
Regardless of the Knighthead plans, Summer 2024 saw the end of the last constraining contracts from the Ren Xuandong days.
This meant the end of the road for the last few players Blues couldn’t move on from the club, allowing for a clean slate squad wise going into the window.
That, along with the promise of big new revenue-raising deals done by Knighthead for the club meant that Tom Wagner could always be confident in his stated aims to invest heavily in the squad this summer.
Relegation to League One offered a wrinkle to negotiations in that Blues would now have to work harder to prove to prospective players that this was the project that they needed to be a part of.
However, it had always been clear from the Open House held in April that Blues were going to spend serious money this summer regardless of what division the team found itself in for the 2024/5 season.
Of course, we know what happened.
While eyebrows were raised when Blues appeared to break the League One transfer record when signing Christoph Klarer and Willum Willumsson, the deadline day purchase of Jay Stansfield blew the minds of many in the game.
Instantly fans of opposing teams started talking on social media about how spending that amount of money was going to either cripple Blues financially, break financial fair play rules or both.
One of the big ideas that comes out with these sorts of statements is the idea of “net spend”.
Net spend is the simple calculation of money spent on transfers in a window minus the money raised from selling players.
As a concept, net spend isn’t necessarily a bad one as it’s an easy way to identify those teams who have spent heavily in comparison to money raised from transfers.
It’s a simple concept for fans to take on board and allows pundits an easy avenue to criticise teams for spending too much money.
However, when looking at finances and financial fair play rules, net spend only has any relevance to showing how much cashflow a club might have available to it.
This is because net spend doesn’t take into account that an asset is being purchased.
When filing accounts, clubs have to show not only the money they have raised in revenue and spent in transfer fees and wages, but the value of the assets they own – which includes players.
To ensure players are valued fairly and consistently across all club accounts, there is a specific methodology for valuation of players.
To value players in this way, clubs take the fee they paid for the player and then reduce it by an equal amount for across the number of years in the player’s contract (up to a maximum of five years).
This process is called amortisation.
So, for example if we assume Jay Stansfield cost Blues £15M and it’s spread across the maximum five years allowed for amortisation under footballing regulations as he signed a seven-year deal, then Stansfield’s value in the accounts will be £12M at the end of this season, £9M at the end of the second season and so on and so forth.
Therefore a fee which seems huge becomes a much more palatable figure and all of a sudden it’s possible to see how Blues might have been able to afford this cost.
As with any accountancy process, this throws up anomalies which clubs can then take advantage of.
The Value of Academy Players
If you’ve been paying attention to the Premier League this summer, it might be that you have noticed some curious transfers between clubs where it looks like they have traded former academy players for huge amounts of money.
These transfers took advantage of an anomaly within the current rules of amortisation whereby Academy players are valued at zero in accounts as no transfer fee has been paid to acquire them.
It sounds counterintuitive but having players valued at zero is really helpful to clubs as it means if these players are sold to another club any transfer fee received is booked in the accounts as pure profit.
And while from a cashflow perspective the money might come in instalments, for the purpose of the accounts this money is booked as profit immediately.
Thus if Team X and Team Y trade academy players to each other for say £20M each with both players signing new five year deals, then both clubs effectively make a profit of £16M for accountancy purposes in that year’s accounts.
In the longer term this kind of trading might be difficult to maintain but its been enough for footballing authorities to think carefully about if the rules need to be changed to prevent clubs gaming FFP rules by conducting these kinds of trades.
However, until that happens it should be obvious to Blues fans that academy players are now a very important commodity to the way Blues are run in the future.
Of course, Blues were beneficiaries of this anomaly in this window.
Because Jordan James came through the academy at St Andrew’s, the transfer fee received from his sale to Stade Rennais will have been booked as pure profit.
This means if Blues received only £4M from the deal, it would be equal to Blues signing £12M worth of players on a three-year deal – which should go a long way to explaining how Blues could afford to do the business they did this summer.
In the longer term, there are costs implicit every year from amortisation which means that realistically it will help if Blues can sell an academy player each summer for a decent fee.
This is why I think one of the most under-the-radar transfers this summer is an indicator for what Blues intend to do in the future.
Cody Pennington was signed by Blues this summeron a two-year deal to slot into the U21 squad having been released by Liverpool following the conclusion of his scholarship in the summer.
Now it might be Pennigton doesn’t make it; although he was 19th man for the recent game against Walsall in the Bristol Street Motors trophy he’s got a lot of competition to get a place in the first team squad let alone play.
Yet if he can do well and Blues can get a fee for him – then that’s more profit in the books which will help balance out purchases.
I suspect we’ll see a lot more players brought in on similar deals at both u18 and u21 level as Blues look to the way Premier League clubs are balancing their books.
However, as Blues fans should know well, banking on future transfer fees as a pillar of financial stability is a fool’s errand.
Raising Revenue
I have to admit, it does make me chuckle to myself when I see fans of other clubs telling us that we are going to be in trouble with financial fair play rules if we’re not careful.
After all, Blues have been the poster child for bad FFP decisions in recent years and we’ve seen just how much profligate spending on wages especially can have long term consequences.
We’ve also seen how banking on the future value of players doesn’t wash with the authorities; anyone remember Ren Xuandong telling the EFL that Lukas Jutkiewicz could be sold for an eight figure sum?
Thankfully, we’re in a different situation now with better owners who are much more competent both from a financial and from a regulatory standpoint.
One thing that might not be clear to fans of other clubs is that in the last twelve months we’ve seen the club make huge strides to improve the amount of revenue the club brings in.
Hospitality and commercial revenue streams have been massively overhauled, and as such it’s my understanding that despite relegation to League One, Blues are on to make a record amount of revenue this season.
Bringing in larger amounts of revenue is important from a regulatory perspective right now as the financial fair play rules in League One – the Salary Cost Management Protocol (SCMP) – cap Blues’ spending on wages in proportion to the amount of revenue brought in.
The more brought in, the more that can be spent on wages – and the easier it is to attract players.
Blues have to be careful in the longer term too.
One of the lessons the club will have learned from the previous regime is that Blues need to look at the next three years with regards to spending.
This is because under Profit and Sustainability rules in the Championship, profits and losses made over a rolling three-year period are judged against a cap set by the EFL.
This means that overextravagant spending now has the potential to ruin even the best laid plans of the next couple of years.
As a former trader in the financial markets, Tom Wagner will be only too aware of how important it is to balance the potential reward of a big deal as opposed to the risk that comes with it.
Sometimes it will be necessary to potentially overpay for players if the reward massively outweighs the risk.
Splashing out £15M plus on Jay Stansfield was in my eyes probably overpaying, and presents one of the biggest potential risks the club has taken in the last few years.
Spreading his fee out over a seven year contract mitigates that somewhat; now the key wil be for Knighthead to show that these transfers can be great from a football perspective, but also a benchmark for how the club can sign players in the future.